Getting Ready for the Corporate Transparency Act

By:  Richard J. Di Marco and Rachael E. Spina

The Corporate Transparency Act (CTA) was enacted on January 1, 2021 to combat money laundering, tax evasion and financing terrorism.  It is an effort by the United States to align its reporting system with the rest of the developed countries.  This new law is estimated to affect some 32 million entities.  Up until this past year the new law had largely gone unnoticed, but the law goes into effect on January 1, 2024, so it’s now time for everyone to be prepared.  The CTA requires certain entities, referred to as “Reporting Companies,” to disclose identifying information about their owners and those who control the entities, otherwise referred to as “Beneficial Owners.”  The reporting information will be maintained by the Department of Treasury’s Financial Crimes Enforcement Network (“FinCEN”).  Willful failure to make the necessary filings can result in some harsh penalties.

Who must report?

Reporting Companies include corporations, limited liability companies (LLCs), limited partnerships, and any other entities created by the filing of a document with the secretary of state or any similar office under the law of any state.  Also included are foreign corporations, LLCs, or other entities that are similarly registered to do business in any state by the filing of a document.  Sole proprietorships, general partnerships, and most trusts are not considered Reporting Companies.

Beneficial Owners are any individuals who, directly or indirectly, either own or control at least 25% of the ownership interests of a reporting company, or exercise substantial control over a Reporting Company, including persons serving as a senior officer (such as CEO, CFO, COO, and general counsel).  Depending on how the business is organized, other individuals, trusts and other entities may also exercise substantial control over a Reporting Company and be subject to the reporting requirements as Beneficial Owners.

Are there any exceptions?  

The CTA provides a number of exceptions as to what is considered a Reporting Company.  Exempt from reporting are mostly entities that are already highly regulated, such as public companies, banks, brokerage houses, investment advisors, insurance companies, accounting firms, government entities, tax-exempt entities, and “large operating companies”.  A large operating company is a company that (i) employs at least 21 full-time employees, and (ii) has $5 million or more in gross receipts or sales.  

Owners who own or control less than 25% of the value and voting power of a Reporting Company are not subject to the reporting requirements, nor are employees other than senior officers.  Trustees of trusts owning a 25% or greater interest are treated as Beneficial Owners subject to reporting, but trust beneficiaries generally are not, unless they are able to exercise substantial influence over the trust assets.

What information will the CTA require to be reported?

The CTA requires a Reporting Company to identify itself by providing the following information:

• Entity name (including any trade names or “doing business as” names used),
• Business street address,
• Jurisdiction of formation, and
• Taxpayer Identification Number (TIN) or an Employer Identification Number (EIN).

A Reporting Company will also be required to report the following information about each of its Beneficial Owners:

• Name,
• Birthdate,
• Residence address, and
• A unique identifying number and issuing jurisdiction from an acceptable identification document, such as a passport or driver’s license, and a copy of the document.

When will the information be required to be reported?

The effective date for the CTA is January 1, 2024.

If a Reporting Company was created or registered before January 1, 2024, it will have one year (until January 1, 2025) to file its initial report.

If a Reporting Company is created or registered after January 1, 2024, it will have 30 days after receiving notice of its creation or registration to file its initial report.  (For the calendar year 2024, FinCEN has proposed extending the 30-day period to 90 days.)

If there are any subsequent changes to the reporting information, those changes must be reported within 30 days of the date the change occurs.

What are the penalties for noncompliance?

Failure to report, or supplying false information, may subject an individual to civil and criminal penalties.  The Reporting Company must file the reports; beneficial owners are not required to file individually.  However, the Reporting Company must take measures to ensure that these individuals provide accurate and up-to-date information.  Any person (e.g., a beneficial owner or senior officer) who willfully provides false information or fails to report as required, despite knowing the law, may be liable for civil penalties of $500 for each day that the violation continues (up to $10,000), and criminal penalties of imprisonment of up to two years and fines of up to $10,000.  No civil or criminal penalties apply to negligent violations.

Who has access to the information reported?

• U.S. government agencies
• Certain foreign agencies and authorized persons
• Financial institutions subject to appropriate protocols

The information reported to FinCEN under the Reporting Rule will not be accessible to the public and is not subject to Freedom of Information Act requests.

What should business owners do to prepare?

Determine if your entity is a Reporting Company and who the Beneficial Owners of the entity are.  If your entity is a Reporting Company, begin locating the necessary information about each Beneficial Owner so you can be ready to submit the information in 2024.  Be aware of the CTA reporting requirements for all entities in which you currently have an interest and those you intend to create in the future.  FinCEN recently issued a Small Entity Compliance Guide and FAQs on Beneficial Ownership Information Reporting, available on the FinCEN website.

We recognize that there is a substantial amount of information here to digest, and that those with an interest in any business may have questions about their reporting obligations.  At Cohen and Wolf, we are committed to staying ahead of these developments by providing timely updates and advice tailored to the specific needs of our clients.  Please don’t hesitate to contact us with any questions or concerns you may have.

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